Ambulatory surgery centers (ASCs), freestanding facilities that specialize in surgical and/or diagnostic procedures that do not require an overnigh stay, have grown at rapidly in recent years. ASCs are now the dominant provider of outpatient surgery in the US. Two types of ASCs exist in today's healthcare market place. One model focuses on a single product line such as gastroenterology. The other type of ASC is the multispecialty (multiproduct) model. The typical multispecialty ASC is akin to a hospital outpatient surgery department in that it offers the gamut of services performed by different physician specialists. Published research to date, however, failed to recognize potential differences linked to specialization and thus assumed all ASCs are alike. Empirical evidence documenting the potential cost advantages of ASCs is sparse because these facilities are not required to submit either cost or volume data to CMS. This explains why Medicare's new payment system for ASCs, implemented in 2008, was established without critical information - reliable and accurate estimates of costs. Despite the rapid expansion of both single specialty and multispecialty ASCs coupled with the new payment system, to our knowledge, empirical studies evaluating linkages between specialization, production costs and payment rates are nonexistent. Our proposed research addresses this significant gap in knowledge. With funding from a R21 exploratory grant we demonstrated that it was feasible to estimate a cost function for single specialty ASCs that focus on gastroenterology procedures. This proposed research extends our prior work and will provide a more comprehensive picture of the relationship between ASC specialization, costs, efficiency and adequacy of ASC payment rates. The specific aims are: 1) To estimate cost functions for single specialty and multispecialty ASCs and use the results to determine economies of scale for each organizational type; 2) For specific diagnostic and surgical procedures we will compare single specialty and multispecialty ASC production costs to insurers' payment rates to ASCs; and 3) To examine relative cost inefficiency of single specialty ASCs and competing multispecialty ASCs using stochastic frontier analysis. We propose to investigate these issues using panel data for freestanding ASCs located in Pennsylvania over the time period 2004-2014. Pennsylvania is home to many ASCs (281 in 2012) and it is the only state that collects operating expenses for ASCs. The data collection procedures, which began in 1996, are standardized and well-established suggesting that reporting reliability and accuracy is high.